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Secured Creditor’s Obligations to Dispose of Collateral in Commercially Reasonable Manner Triggered Only Upon Possession

In a recent, well-written opinion, the Tennessee Court of Appeals, Middle Section, WM Capital Partners, LLC v. Thornton, No. M2015-00328-COA-R3-CV, filed January 17, 2017, determined that a secured creditor’s duty to dispose of collateral in a commercially reasonable manner commences when the secured creditor obtains actual or constructive possession of the collateral.  Applying Article 9 of the UCC, as adopted by Tennessee, the Court noted the optional remedies available to the secured creditor – allowing it to decide when and how, with appropriate judicial process, to take possession of the collateral or disable it and dispose of it in place.

The debtor, a trucking company, lost its major customer, General Motors’ Corvette Plant in Bowling Green, Kentucky.  After a series of forbearance agreements, but while the collateral apparently exceeded in value the debt, the debtor demanded the repossession and sale of its collateral.  The original lender refused to do so.  Eventually, the original lender sued on the debt, but was contemporaneously placed into receivership by the FDIC.  The FDIC sold the loans and the purchaser ultimately foreclosed generating deficiency claims against the debtor and the guarantors.

The Court expressly determined that, standing alone, the delay between the first request for repossession of the collateral and the date of the auction did not render the disposition of the collateral to be commercially unreasonable.  The Court applied the plain meaning of the UCC to find no duty of “a secured creditor to accede to such a request or right on the part of the debtor or obligor to make such a request.”

The Court recognized the case law indicating unreasonable delay in disposition of collateral may be one factor to consider in the commercial reasonableness of the disposition.  However, in each such case, the collateral was in the actual or constructive possession of the creditor.

Since “constructive possession” is a question of fact, according to this Court, one wonders what future creative efforts by debtors to push the problems of rapidly declining collateral upon the secured creditor will remain.


by William R. O'Bryan, Jr.